Burger King Holdings, Inc. Reports Fourth Quarter and Full Fiscal 2010 Results

Burger King Holdings, Inc. (NYSE:BKC) reported results for the fourth quarter and full fiscal year 2010. Key highlights of the company’s fourth quarter and full fiscal year 2010 results include:

“While fiscal 2010 was an extremely difficult operating environment, the brand re-ignited traffic, opened 249 net new restaurants globally, expanded our reach into strategic markets like Russia and continued our disciplined approach to our re-imaging initiative”

Fourth quarter fiscal 2010:

• Worldwide comparable sales were negative 0.7 percent compared to negative 2.4 percent in the same period last year;

U.S. and Canada comparable sales were negative 1.5 percent compared to negative 4.5 percent in the same period last year;




• Solid development growth continued with net restaurant count increasing by 59; and
• Diluted earnings per share were $0.36, including $0.01 per share of negative impact from currency translation, compared to diluted earnings per share of $0.43 in the same quarter last year. Last year’s diluted earnings per share included a $0.07 tax benefit from the dissolution of dormant foreign entities and this year's diluted earnings per share included a $0.02 tax benefit from the resolution of state tax audits and changes in state tax uncertainties.

Fiscal year 2010:

• Worldwide comparable sales were negative 2.3 percent compared to positive 1.2 percent in the same period last year;
• U.S. and Canada comparable sales were negative 3.9 percent compared to positive 0.4 percent in the same period last year;
• Net restaurant count increased 249 over the prior 12-month period, representing a net restaurant growth rate of 2.1 percent:
  • The company posted positive net restaurant growth across all reporting business segments with over 90 percent of the increase realized outside of the U.S. and Canada;
• Paid down $67.7 million of debt and capital leases;
• Reduced net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio to 1.5 times from 1.9 times in the prior year^1,2; and
• Diluted earnings per share were $1.36, compared to diluted earnings per share and adjusted earnings per share of $1.46 and $1.48, respectively, in the prior year. Last year’s diluted earnings per share and diluted adjusted earnings per share included a $0.12 tax benefit from the dissolution of dormant foreign entities and from the positive resolution of federal and state tax audits.

¹ EBITDA is a non-GAAP financial measure; see the ‘performance indicators and use of non-GAAP financial measures’ section of the form 8K for the reconciliation to GAAP measures and why management believes this is a meaningful measure.

² Total debt includes short-term debt and capital leases, long-term debt and long-term capital leases. Total net debt is debt minus cash in excess of $50 million.“In fiscal year 2010, we faced sustained levels of high unemployment and a fragile global economy that combined made this one of the toughest operating environments in recent history,” said Chairman and Chief Executive Officer John Chidsey. “Even so, we remained focused on our True North Plan and effectively managed the business for the long-term. We posted positive worldwide traffic during the last nine months versus the prior year period, opened 249 net new restaurants during the fiscal year and kept pace with our re-imaging initiative while maintaining a strong balance sheet.

“We also made significant progress with the deployment of new restaurant equipment to enhance operations and our on-going portfolio management initiative that included the refranchising of 79 restaurants in the U.S. and Germany in the fourth quarter alone.”

Worldwide revenues for the fourth quarter of fiscal 2010 were $623.0 million, down 1 percent compared to the same period last year. Revenues were primarily impacted by negative worldwide comparable sales and currency translation. The decrease was partially offset by the addition of 249 net new restaurants over the prior 12-month period. For the full fiscal year, the company reported revenues of $2,502.2 million, also down 1 percent compared to the same period last year. The annual decrease was primarily driven by negative worldwide comparable sales, partially offset by favorable currency translation and net restaurant growth.

Fourth quarter worldwide comparable sales were negative 0.7 percent compared to negative 2.4 percent in the same period last year. The company posted positive comparable sales in its EMEA/APAC and Latin America business segments led by strong performance across its Asia Pacific and South American markets. Additionally, worldwide traffic was positive and increased compared to the same period last year.

Fourth quarter comparable sales in the U.S. and Canada were negative 1.5 percent compared to negative 4.5 percent in the prior year period. The segment realized higher traffic during the quarter and full fiscal year compared to the same periods last year. Additionally, in the U.S., the company experienced a sequential quarterly improvement in traffic and average check from the fiscal 2010 third quarter. Average check in the U.S. was aided by the launch of premium products including BK^TM Fire-Grilled Ribs.

Product offerings during the quarter included a mix of affordable value and premium items aimed at driving traffic and check. In the U.S. and Canada segment, the company sought to satisfy consumers seeking value across the entire menu including $1 offerings such as the BK® Breakfast Muffin Sandwich, Buck Double and ICEE promotions. Additionally, the company offered more premium fare such as the BK^TM Breakfast Bowl, Whiplash Whopper^® sandwichin connection with the Iron Man^TM 2 promotion and BK^TM Fire-Grilled Ribs.

The EMEA/APAC segment also featured a mix of affordable value and premium items including the Stunner Deals^TM program, King Deals^TM,various Whopper^® sandwich promotions and LTOs. The Latin America segment focused on affordability across the menu with the continuation of the Come Como Rey^TM (Eat Like a King) and BK^TM Ofertas(King Deals)campaigns, increased advertising around the breakfast daypart and Whopper^® sandwich LTOs.

Marketing efforts leveraged across many markets included promotional movie tie-ins with Iron Man^TM 2 and The Twilight Saga: Eclipse. The company also featured Superfamily promotions such as SpongeBob SquarePants^TM Last Stand and Marmaduke^TM.

During the fourth quarter, the company continued to strategically diversify its global portfolio with the opening of 59 net new restaurants. For the full fiscal year, net restaurant count increased 249 over the prior 12-month period, representing a net restaurant growth rate of 2.1 percent. The company posted positive net restaurant growth across all business segments with over 90 percent of the restaurants opened outside of the U.S. and Canada.

The company posted worldwide company restaurant margins (CRM) of 10.7 percent in the fourth quarter and 12.2 percent for the full fiscal year, a decrease of 180 and 40 basis points, respectively, over the same periods in the prior year. During the fourth quarter, CRM was negatively impacted by higher food, paper and product costs primarily driven by increased beef prices in the U.S. partially offset by lower commodity costs in EMEA, and by the deleveraging effect of negative comparable sales on fixed costs. Additionally the quarter-over-quarter increase in depreciation expense largely related to the company’s U.S. and Canada reimaging program and worldwide deployment of new POS systems negatively impacted margins by over 80 basis points. Lower labor costs driven by variable labor control enhancements in the U.S. partially offset the decrease. During the year, margins were primarily impacted by the deleveraging effect of negative comparable sales on fixed costs. In addition, the expected increase in depreciation expense largely related to the company-owned restaurant initiatives mentioned above negatively impacted margins by over 40 basis points.

During the fourth quarter, the company realized $1.3 million of other income as compared to the prior year’s other income of $6.0 million. The main driver of the differential relates to gains as a result of refranchisings of restaurants in EMEA and Canada in the prior year.

Fourth quarter general and administrative (G&A) expenses decreased $6.5 million compared to the same period last year primarily due to on-going cost containment initiatives. For the full fiscal year, G&A expenses increased $3.5 million compared to the prior year period. Currency translation negatively impacted G&A by $4.3 million during the year. Net of currency translation, fiscal 2010 G&A improved 20 basis points compared to the prior year.

The fourth quarter tax rate was 30.8 percent compared to 21.6 percent in the prior year period. This quarter’s tax rate benefited from the resolution of state tax audits and changes in state tax uncertainties, positively impacting diluted earnings per share by $0.02. Last year’s fourth quarter tax rate benefited from the dissolution of dormant foreign entities, positively impacting diluted earnings per share by $0.07. For the full 2010 fiscal year, the tax rate was 34.3 percent compared to 29.7 percent in the prior fiscal year. Last year’s tax rate benefited from the dissolution of dormant foreign entities and from the resolution of federal and state tax audits, positively impacting diluted earnings per share by $0.12. During the full 2010 fiscal year, the net impact of discrete items on the tax rate was not significant.

The company reported fourth quarter diluted earnings per share of $0.36, including $0.01 per share of negative impact from currency translation, compared to $0.43 in the same period last year. As mentioned, this quarter’s diluted earnings per share included a $0.02 tax benefit, while last year’s diluted earnings per share included a $0.07 tax benefit. For the full fiscal year, diluted earnings per share were $1.36 compared to diluted earnings per share and adjusted diluted earnings per share of $1.46 and $1.48, respectively, in the prior year period. Fiscal 2009 adjusted diluted earnings per share excluded $3.5 million related to acquisitions.

Uses of Cash

“Although we experienced negative worldwide comparable sales this fiscal year, our financial fundamentals are solid and our cash flow continues to be strong benefited by our highly-franchised business model,” said Chief Financial Officer Ben Wells. “In fiscal 2010, we paid down $68 million in debt and capital leases, invested $150 million primarily to enhance our company restaurant portfolio and returned $34 million to shareholders through our quarterly dividend payments while increasing our cash balance by $66 million.”

In fiscal 2010, the company invested in its U.S. and Canada reimaging program, completing another 54 projects including company restaurants and properties leased to franchisees. Since the inception of the program nearly two and a half years ago, the company has re-imaged 170 restaurants. In addition, the BURGER KING® system has 327 restaurants globally that have adopted the company’s new 20/20 design.

“Also during the year, we executed on our portfolio management initiative including the refranchising of restaurants in the U.S. and Germany and the acquisition of restaurants in Singapore,” Wells said. “We expect to continue our disciplined approach to portfolio management in an effort to optimize our company-owned restaurant base, enhance development agreements with new and existing franchisees, reduce concentration in certain markets and opportunistically enter new markets. As it relates to refranchisings, within the next three to five years we expect to refranchise up to half of our current company-owned restaurant portfolio.”

Fiscal year review and looking ahead

“While fiscal 2010 was an extremely difficult operating environment, the brand re-ignited traffic, opened 249 net new restaurants globally, expanded our reach into strategic markets like Russia and continued our disciplined approach to our re-imaging initiative,” Chidsey said.

“Going forward, we believe we are well-positioned to further expand our global footprint and continue to invest in our re-imaging program. There is great enthusiasm in the system around our 20/20 design and we have rolled out an attractive development and re-imaging incentive program for our franchisees in select key markets.

“Our robust product pipeline is filled with affordable as well as premium offerings. We are also laser focused on the U.S. and Canada fall launch of our enhanced breakfast platform that will include several new breakfast products and will feature Seattle’s Best Coffee®. Our new premium coffee will also complement our expanding beverage platform. In addition, our upcoming U.S. marketing campaigns include our newest partnership with Microsoft to support the launch of the highly-anticipated Kinect™ for Xbox 360® just in time for the holiday season.”

Chidsey concluded: “As we enter fiscal 2011, we anticipate that the challenging consumer environment will continue due to high unemployment and underemployment levels and weak consumer confidence. However, our team will continue to invest in all aspects of our business to drive profitable sales. We will do that by focusing on our long-term strategies and delivering against the four pillars of our True North plan -- Growing the Brand, Investing Wisely, Running Great Restaurants and Focusing on People.”

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